Throw This Stock Away

The house rules are simple in this weekly column. I bash a stock that I think is heading lower, and I offset the sting by recommending three stocks as portfolio replacements. So who gets tossed out this week? Come on down, Tesla Motors (Nasdaq: TSLA  ) .

If you build it, they will run
The cutting-edge automaker was a blazing-hot IPO yesterday. At a time when some Wall Street debutantes have had to scale back their plans or shelve their offerings entirely, Tesla was able to bump up its minted shares by 20% to 13.3 million.

That's the first of three examples of heightened demand for Tesla. Next? The original $14-to-$16 price range was bumped to $17 at the last minute. If you want the third example, just pull up a current quote. After its first day of trading, the stock closed up 40% (peaking momentarily at $25 per share), despite a blisteringly negative day across the board.

The oft-delayed Tesla Roadster quickly became the rich toy of choice, with the automaker moving more than 1,000 of the slick $109,000 eco-friendly speedsters since last year's launch. The real buzz for Tesla -- the first stateside carmaker to go public in more than 50 years -- is the more accessible sedan that's slated to hit the market in two years at a price point closer to $50,000.

My concern with Tesla and all of the hype surrounding yesterday's IPO is that there are still more question marks than exclamation points. Yes, Tesla is cool, but it's also likely several years away from profitability.

Tesla's concept of electric cars turned heads a few years ago, but it's old news these days. Chevy's Volt and Nissan's Leaf should hit the market later this year, and hybrids have served well as an intermediary step in weaning folks off gasoline dependency.

Don't get me wrong. Tesla is exciting. It has momentum. It has well-wheeled partners, with Daimler and now Toyota (NYSE: TM  ) as investors. This isn't going to be Tucker -- or even Segway -- revisited. However, I think there are economies of scale that will fail to materialize for a company targeting to move 20,000 of its sedans annually in a couple of years. Drivers who may be drawn to the novelty may begin to fret over service and parts.

I'm all for buying into Tesla when it's at least closer to proving itself. A company with a 10-figure market cap doesn't seem like a compelling value, especially since any material upside is still a few years away.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Ford (NYSE: F  ) : Unlike GM or Chrysler, Ford became the stateside darling after resisting the government bailout. Its reward has been a sweet turnaround. The same shares that fetched as little as $1.01 a share 19 months ago have popped tenfold. Ford has gone on to crank out better-than-expected profits in each of the past few quarters, and sales are going through the sunroof. Despite the stock's torrid run, Ford is fetching a single-digit earnings multiple. Things can change if the economy veers off into another ditch, but that would be an even uglier crash for Tesla.
  • Sirius XM Radio (Nasdaq: SIRI  ) : Satellite radio has been one of the bigger beneficiaries of the automotive industry's turnaround. Things were looking bleak for Sirius XM before it was bailed out by a beefy Liberty Capital (Nasdaq: LCAPA  ) cash infusion and made a surprisingly rapid transformation into a profitable company.
  • Apple (Nasdaq: AAPL  ) : If investors want a company putting out cool products, why not warm up to the tech giant that's already commanding long lines for its premium-priced products? Whether it's clearing 1.7 million iPhone 4 smartphones in three days or 3 million iPads in less than three months, don't you get the feeling that it would succeed even if Steve Jobs ever took the wraps off an electric iCar? I hope you're not nodding along, because I was just kidding. Apple's allure has actually come as it has priced its wares for the masses. Consumers paid as much as $599 for the first iPhones three years ago. They're paying a third as much for superior devices now. Tesla's mainstream success is going to come at much lower price points, if it makes it that far.

I'm sorry, Tesla. I'll have to put you up on concrete blocks for now.

Apple and Ford Motor are Motley Fool Stock Advisor picks. If you're into window shopping, try any of the newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has a Prius in his driveway, but it's not his. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (24)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2010, at 12:48 PM, Haystack65 wrote:

    Your recommendation to buy SIRI seems a bit out of touch. Moving debt out several years so that it's "off the current books" doesn't make a company profitable, it just makes it look that way. Also, Liberty is busy reorganizing their own company to divide up their own massive debt and stash their unprofitable holdings into one portion of the company. What's next after that? Most likely a spin-off of that part of the company to someone willing to take the risk on those losing propositions... but will Liberty get enough from the deal to pay down it's own debt and also keep the SIRI debt load fed as well? Probably not... this situation has all the hallmarks of a debt to earnings ratio problem that will implode. Liberty is no savior for Sirius.

    Look forward to a future article where you correct this recommendation and replace SIRI with 3 other stocks...

  • Report this Comment On June 30, 2010, at 7:35 PM, greenwave3 wrote:

    Ford is looking solid. Easily the best U.S. automaker. Shares are trading at a discount right now.

    Can't say I agree with your SIRI pitch. It is a struggling company with boatloads of debt, plus new technologies threaten its very existence (mobile Wi-Fi hot spots and free internet radio, just to get the ball rolling).

  • Report this Comment On July 01, 2010, at 11:13 AM, mmihai wrote:

    In my opinion Tesla is a promising project, but as any young company, it represents a two edged sword; however, I give them a lot of credit for their incredibly powerful electric cars. That gives them the competitive advantage over other car makers.

    You mentioned Nissan Leaf and Chevy Volt. I don't think this is the appropiate comparison. They don't target the same buyers as their engine's performance levels differ. At this time,I think that the most important challenge for Tesla is to survive these rough economic times, because as attractive as it looks, people have become more conservative in terms of spending on luxury goods. I don't think the demand for their cars will pick up for another one, maybe one and a half years.

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